Hong Kong Monetary Authority issues good practices on climate-related risk governance for banks

On 22 August 2024, the Hong Kong Monetary Authority (HKMA) issued a circular sharing some industry good practices and key observations on climate-related risk governance for authorized institutions (AIs). The HKMA understands that it may be difficult for AIs to incorporate climate-related measures into their governance framework given the evolving nature of the risks, and that climate-related risks may affect AIs’ exposures to multiple inherent risks assessed under the HKMA’s risk-based supervisory approach. The good practices highlighted are part of the HKMA’s outreach to the banking industry to assist them in improving their climate risk management practices.

Key observations

The good practices and observations are based on the HKMA’s findings from recent supervisory exercises conducted on the AIs’ governance practices for climate-related risks. The HKMA has grouped its key observations into three categories:

1. Fostering and overseeing the effective development and implementation of climate strategy - Most AIs or their banking groups participating in the exercises have set climate goals and targets to guide their actions and report regularly to the board and/or senior management on their progress. Using various tools, participating AIs conducted strategic assessments to inform the formulation of their climate strategy and further devised action plans to support the implementation of these strategies.  
2. Exercising appropriate oversight of climate risk management - All participating AIs have incorporated climate-related considerations into their risk management frameworks and policies.  These AIs use various tools such as climate/ESG risk questionnaires, internal climate/ESG risk ratings or scoring frameworks, enhanced due diligence and client engagement to incorporate climate-related risk considerations in their credit risk assessment process.
3. Cultivating a strong organisational climate risk culture - Participating AIs have been working to cultivate a risk culture that embeds climate-related considerations into their business activities and decision-making process, such as in their performance evaluation and remuneration frameworks, as well as their training programmes.  To promote transparent communication, some AIs have published climate-related disclosures, and some raise staff awareness of climate-related risks and opportunities through internal sharing sessions, newsletters, and internal campaign activities.

Recommended good practice 

The annex to the circular contains details on the good practices that the HKMA has identified as effective in helping AIs to enhance their climate-related risk governance frameworks and other relevant measures. The HKMA refers to the following findings:

• Enhancing governance structures to manage climate-related risks and opportunities – governance structures can be enhanced by establishing dedicated committees to support the oversight of climate-related issues, creating cross-functional working groups to coordinate climate-related tasks, keeping the governance structure under on-going review and ensuring adequate discussions of climate-related matters at the board and senior management level;
• Setting clear climate goals in line with global and local developments – many AIs also include green and sustainable finance targets in their climate goals, which reflect their commitment to assist their customers in their low-carbon transition journey;
• Conducting an effective strategic assessment to inform the formulation of climate strategy - AIs can conduct regular materiality assessments as part of their process to evaluate their strategic positions with regard to climate risks and opportunities.  During the assessment process, AIs can consider engaging both internal and external stakeholders to identify climate- or sustainability-related topics that are most relevant and material to their business and operations, which will in turn inform the development of their climate strategies;
• Devising an appropriate action plan and deploying adequate resources to support the implementation of climate strategy – the action plans can include specific and concrete milestones and measures over different time horizons, such as reducing greenhouse gas emission, supporting clients’ transition, strengthening engagement with relevant stakeholders, regularly reviewing and enhancing internal processes and procedures for climate-related tasks, and providing relevant training;
• Developing and monitoring quantitative metrics for inclusion in the climate risk appetite statement – AIs can development quantitative metrics in their climate risk appetite statement (RAS) to govern their risk-taking activities. Some examples of these quantitative RAS limits or metrics include the concentration of credit exposures to high-emitting sectors, the amount of collateral vulnerable to physical risks, and the size and growth of the green and sustainable finance portfolio;
• Developing appropriate tools for embedding climate risk considerations in credit risk assessment processes – these tools can be climate/ESG risk questionnaires, internal climate/ESG-related risk rating or scoring frameworks and enhanced due diligence and client engagement;
• Embedding climate-related considerations into performance evaluations and remuneration frameworks – AIs can consider incorporating climate-related considerations into their institution-wide performance evaluations with the relevant assessment criteria set out for the board, senior management and general staff, proportionate to their respective roles and responsibilities;
• Offering training tailored to roles and responsibilities of its staff and setting out climate and ESG-related training requirements – AIs can ensure that their staff are provided with sufficient training by setting mandatory duration-based requirements on climate and ESG-related training so as to help equip their staff with the necessary knowledge to carry out their daily tasks; and
• Promoting timely and transparent communication on climate-related issues with internal and external stakeholders – AIs can also consider holding internal staff sharing sessions, issue newsletters and internal campaigns to raise awareness on climate-related risks and opportunities.

As this is a developing area, the HKMA will continue to refine its supervisory approach in this area, so we expect further guidance to be issued by the HKMA as part of their on-going work in this area, for example, incorporating climate considerations into the HKMA’s Supervisory Review Process and continued thematic examinations on banks’ climate risk management practices.